How America Grew -- and Grew Unequal

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AP Photo/Diane Bondareff

This article appeared in the Summer 2016 issue of The American Prospect magazine. Subscribe here.

The Rise and Fall of American Growth: The U.S. Standard of Living Since the Civil War

By Robert J. Gordon

Princeton University Press

Unequal Gains: American Growth and Inequality Since 1700

By Peter H. Lindert and Jeffrey G. Williamson

Princeton University Press

Perhaps the most arresting moment in Robert J. Gordon's comprehensive history of American economic growth comes near the end, when he explains that the yardstick he has been using no longer works very well. "Throughout this book, progress has been measured by the rate of advance of average real GDP per person. … Such averages … may be misleading if the pace of improvement benefits those who have high incomes more than those who have middle or low incomes." And indeed, he goes on to note, that turns out to be the case. We've long known we live in an era of remarkable and increasing income inequality, in which a small number of very rich Americans enjoy economic, educational, and political opportunities foreign to most of us. But the rich have lately grown so different from you and me that they've spoiled the social science that sufficed for 600 pages of solid economic history and, Gordon says, now threaten to end altogether the story of American prosperity he has sought to tell.

Gordon argues that the century from 1870 to 1970 was special, owing to the unrepeatable and broadly diffused economic benefits of inventions that emerged during this period. During this time, Americans moved from farms to cities, and eventually even the basic technologies of the city reached the farms. The American home, once a lonely and self-contained enterprise, became a node in a national network of electricity, gas, running water, sewer lines, transportation, and communications. This joining of the nation's isolated atoms into a single whole permitted access to markets and also improvements in health and quality of life that amounted to a "revolution in the American standard of living." But that national network now exists, so we cannot again reap the benefits of forging its links. The age of revolutionary growth has passed. Moreover, Gordon says, even a return to strong evolutionary growth appears unlikely in the face of what he calls "headwinds"-including inequality, accumulated debt, environmental damage, poorer education, and an aging population-that blow opposite to the direction Americans would wish to go.

Gordon's ending admonition that the increasingly disproportionate share of income raked off by the very rich threatens economic growth may surprise any readers used to thinking of the wealthy as job creators, virtuously willing to part for a time with their capital, investing it in enterprises that generate employment. On this view, increasing inequality is both the economic equivalent of potential energy, a coiled spring set to produce growth at any moment, and also evidence that bread cast upon the waters returns manifold after the passage of time. But Gordon's work suggests otherwise: Over the course of the century he examines, the years of strongest economic growth fall in the middle, during the period of lowest inequality, which occurred in part because of government policy.

At the time of the U.S. economy's strongest growth, the federal government taxed incomes at a top rate of 90 percent and inheritances at nearly 80 percent.

What Gordon observes about inequality and growth in history was outlined by John Maynard Keynes when the pattern Gordon describes still lay in the future. Keynes concluded his General Theory of Employment, Interest and Money by offering a set of policy recommendations. He observed that the engine of economic growth was not investment by the few, but consumption by the many. Still, he allowed, "significant inequalities" should continue to exist-not because they were essential to economic growth, but because they offered an outlet to predatory impulses that might otherwise fuel more antisocial activities. "It is better," Keynes suggested, "that a man should tyrannise over his bank balance than over his fellow citizens." (He recognized that a sated appetite for money did not necessarily obviate the zeal for cruelty, but "sometimes at least it is an alternative.") Even so, Keynes said, if society should suffer some inequality to persist, it should not be much and certainly "it is not necessary for the … satisfaction of these proclivities that the game should be played for such high stakes as at present."

Indeed, at the time Keynes was writing, the stakes for investment activities were at a historic peak, as Peter H. Lindert and Jeffrey G. Williamson document in their Unequal Gains. (Full disclosure: Lindert is an emeritus professor of economics at the University of California, Davis, where I teach in the history department; we once co-authored a 2004 op-ed on trade policy.) The returns to purely financial investment would shortly plummet, in part because the U.S. government under the New Deal regulated the financial sector, making it less profitable and more stable-which it remained until it was deregulated, beginning in the 1970s. Lindert and Williamson find that the failure to regulate returns to high finance as Keynes suggested is one of several non-economic factors that drive inequality. Politics, wars, demographic shifts, international trade, and education are also consequential, they write. "Inequality movements are not driven by any fundamental law of capitalist development but instead by episodic shifts," they write, which means that sometimes the trend of inequality is unpredictable, and at other times-as recently-it is entirely avoidable.

Because Lindert and Williamson concern themselves with relative income, comparing Americans' standards of living to those of people elsewhere in the world, they are less impressed with the century from 1870 to 1970 than Gordon. Their study is both briefer and wider-ranging than his. Indeed, Lindert and Williamson focus much of their effort on bringing together and analyzing new, pre-1870 data. They find that the colonial-era slogans that America was a land of opportunity and "the best poor man's country in the world" hold up. Income was high and inequality low, so that all but the very richest British North Americans had a higher standard of living than their counterparts in Britain.

The price of the war for independence was a drop in that comparatively high standard of living. After the new republic was established, Americans' incomes began to rise again. Then, after 1860, the U.S. Civil War sent them downward again. In Lindert and Williamson's account, which emphasizes relative rather than absolute gains in standards of living, Gordon's "special century" of growth after 1870 was largely a period of catching up. By the end of it, in 1970, Americans' real incomes, relative to those of Britain, had reached about the same level they were in 1770.

Indeed, these exceptions to the rule of increasing American inequality since the 1970s may help explain the political resistance to understanding, let alone addressing, the situation.

Among white American men during this period, all but the rich have lost ground relative to their fellow citizens.

An unregulated financial sector has promoted economic instability while disproportionately rewarding the very wealthiest Americans. Perhaps, logically, most white American men ought therefore to support a state that, as Keynes argued and Gordon argues, would restrain that financial sector and redistribute income. But so long as white American men can be induced to resent instead the women and the African Americans who have slowly and incompletely made progress toward equality, the evidence suggests they will not support such policies.

Indeed, Lindert and Williamson show clearly that history has borne out Keynes's predictions. Higher rates of taxation and adequate public services have not retarded economic growth, either in the U.S. or elsewhere. There is "no lost GDP from taxing the wealthy heavily." The benefits from doing it "are there, like hundred dollar bills lying on the sidewalk." We lack only the flexibility and dexterity required to retrieve them.

Both these books take great empirical pains, carefully presenting a variety of measures that disprove the refrain of American politics today-the insistence that we cannot afford better. We could, without imperiling the action of America's great economic engine, invest more in education, health, and the well-being of our citizenry by ensuring that rich Americans enjoyed a share of the nation's wealth that is merely outsized, not world-historically disproportionate. But both books are equally clear in their glum prediction that we probably won't.